Developing a balance between strategy and risk

With the ever changing landscape of the global economy, there is no “one size fits all” model to risk management. It is essential that the way in which an organization manages its risk be aligned with all aspects of its operations including its strategy, business model, operational systems and procedures, and risk appetite.  

In order to achieve a complimentary synergy between its business strategy and risk tolerance, organizations need to focus on developing a “risk intelligent culture” that drives the behaviors that influence day to day operations.  

Effective risk governance requires the board of directors and management to understand that management of risk is fundamental to the pursuit of value, and to guide the organization in managing its risk exposures so that it incurs the optimum level of risk to effectively achieve its strategic goals. To maintain a balance between risk and business strategy, a risk intelligent culture applies the complimented efforts of three stages of risk management accountability that span all levels of the organization incorporating:

  • Risk governance, including strategic decision-making and risk oversight, led by the board of directors;
  • Risk infrastructure and management, including designing, implementing, and maintaining an effective risk management program, led by management; and
  • Risk ownership, including identifying, measuring, monitoring, and reporting on specific risks, led by the business units and functions.

To a large degree, an organization’s culture determines how it manages risk when under pressure. For some organizations, their risk culture is a threat. For others, it enables both strength and a competitive advantage. To that end, an organization wishing to cultivate a risk intelligent culture should first understand and measure its existing risk culture by identifying both challenging risks and strategic opportunities that face their business.

Of all the types of risk that generate concern to boards and executives, strategic risk is the one most likely to present both significant threats and opportunities to an organization. Strategic risk is unlike other forms of risk in that it can present a blind spot making it difficult to detect. That blind spot results from the failure to consider the likelihood that the strategy itself may be flawed because it is based on assumptions that may no longer be applicable or valid. Because variables are constantly changing, a strategy that at the onset may have been structured to succeed under certain conditions may be unachievable should those variables change. These ever-changing variables are the premise for why business strategies and their underlying assumptions should be dynamic and continuously assessed.

An area that presents a challenge for industry leaders is a common unwillingness to question the underlying assumptions of their business strategies and execution efforts until it is too late.

However, many successful marketplace contenders acknowledge their achievements to their willingness to take on risks – in other words, to boldly challenge established assumptions by presenting enhancements that may initially seem precarious, such as entering new markets or offering new services.

In order to protect themselves against being misled by potentially invalid assumptions, organizations can incorporate a method termed the “Thesis-Antithesis-Synthesis” (TAS). Essentially, the first stage with TAS is to declare a thesis – a proposition or assumption that is critical to the success of the organization.

The thesis signifies the established perception of what the organization considers to be factual and expected. The second stage is to establish an anti-thesis which counters the thesis. The anti-thesis focuses on the “worst case scenario” or the unexpected outcome, and challenges management by asking “What if you are wrong?”. The last stage is to determine the consequences of the thesis and anti-thesis for the organization and establish an enhanced, integrated approach that incorporates both the thesis and the anti-thesis resulting in a “best of both worlds” scenario.

The TAS approach is a notable method for recognizing an organization’s existing assumptions and contesting them in an applied fashion. It allows management to evaluate the assumptions that are the basis of their strategy, and to examine them under various circumstances. Additionally, it gives management the opportunity to develop strategies that can be used under a series of scenarios regardless of whether the scenarios come to fruition.

Strategic planning is an interactive process requiring the organization to continuously assess the business objectives and underlying assumptions. It is essential to recognize this fundamental obligation to assess the assumptions and the strategic direction of the organization. Being able to distinguish the synthesis and anti-thesis of an assumption is a critical step towards developing a risk intelligent strategy and strengthening the risk intelligent culture of the organization.

In addition to TAS, there are two additional considerations organizations can take in order to enhance their knowledge of how unforeseen events could potentially impact their business operations, and move towards a strategy that incorporates both sides of the spectrum in relation to the foreseen and unforeseen scenarios.

Firstly, examine the organization’s strategic position for signals that unanticipated events may be on the horizon or may be ensuing. Organizations should be continuously monitoring their surroundings in order to foster a risk intelligent system within their organizational culture that is able to detect, acknowledge and assess signals as they emerge.

A second factor for management to consider when unforeseen events are identified is whether they are threats, opportunities or both. By performing this analysis, management is able to gain a better understanding of the importance of each circumstance in relation to their business operations and helps them develop strategies on how to manage them should it become necessary. Most importantly, it helps management realize that not all unforeseen events should be viewed negatively, allowing them to be open-minded to identify opportunities that may materialize and enhance their competitive position in the market.

Once the strategic assumptions have been classified, tested and enhanced to reflect any unforeseen variables, management should have the ability and understanding to address the implications of the unexpected in relation to tailoring their risk intelligent strategy. In doing so, the organization should be in a position to create a portfolio of various strategic options based on the underlying assumptions, which should be monitored and managed until the preferred opportunity materializes.

Those organizations that take a proactive stance by assessing early shifts in their market and competitive environment, have the added advantage of being able to seize opportunities and minimize potential threats than those organizations that do not.
Ideally, an approach for organizations to create and enhance their competitive position in the market is to create the shifts towards their business strategy as oppose to waiting for the shifts to happen – “to become the disruptor in the process of creative destruction.”

The material in this article is based on the Deloitte ‘Shaping a Risk Intelligent Strategy’ publication.



Previous articleAdam Lebor’s “Tower of Basel”
Next articlePortfolio insurance companies
Michael Klein Editor Pinnacle Media Group Ltd. PO Box 1365, Grand Cayman, KY1-1108, Cayman Islands T: 345-326-1720C: 345-815-0064 E: Michael is a financial journalist and copywriter.  In the past he has been responsible for the Risk Management and Corporate Finance sections of a British monthly Corporate Treasury publication.  He has written various financial handbooks, notably on European Banking and Cash Management and the Debt Capital Markets.   In addition he has worked as a copywriter for banks and investment funds and served as corporate communications consultant to US and European blue chip companies.   Michael holds an MA in Political Science and International Law from the University of Bonn in Germany. 

Pinnacle Media Ltd

Cayman Financial Review is the only magazine which promotes the Cayman Islands financial services industry at a local and international level. Produced by Cayman’s leading printing and publishing company Pinnacle Media Ltd, the Cayman Financial Review is published quarterly and is distributed in print and online to organisations and associations worldwide as well as at key financial conferences.

Over 30,000 online and targeted printed copies are distributed to clients, their nominated local and international contacts, relevant conference participation lists and a current researched international contact list continuously updated and prepared by Pinnacle Media Ltd. In addition the product has a fully integrated website, a link of which will be sent to ‘Top 500’ legal, accountant, government, insurance, financial service and hedge fund contact list in United States, United Kingdom, Europe, South East Asia, Dubai and the South Americas.

The Compass Centre
Shedden Road
PO Box 1365 GT
Grand Cayman
Cayman Islands
British West Indies

T: +1 (345) 949-5111
F: +1 (345) 949-7675